Fund Characteristics

The Company was founded in 1926 and Nick Train has managed the portfolio since his firm, Lindsell Train, was appointed as Investment Manager in 2000.

Nick’s approach is based on that of Warren Buffett’s and involves building a concentrated portfolio of “quality” companies that have strong brands and/or powerful market franchises. The bulk of these are UK companies. This leads to a very different portfolio when compared to the benchmark FTSE All-share Index.

The characteristics that define a quality company for Lindsell Train are:

• Durability – companies that can prosper through business cycles for many years to come;
• High return on equity – companies with the ability to grow earnings year-in, year-out are favoured over those with rapid short term growth, but uncertain long term prospects;
• Low capital intensity/high free cash flow generation – companies that do not have to make heavy balance sheet investment to generate earnings growth.

The portfolio has a heavy emphasis on branded consumer goods and services (Diageo, Unilever, Kraft, AG Barr), media (Pearson, Sage) and financial services (Fidessa, Schroders, Rathbones, Hargreaves Lansdown.

Nick tries to buy stocks which are priced below his estimate of the company’s true worth and then holds them for the long term, regardless of short term volatility. In this way he hopes to hold stocks long enough for then to double or better in value over time. He only sells them if he no longer considers them quality companies or when their rise in value causes them to become too large a proportion of the portfolio.

This investment approach results in extremely low turnover and saves transaction costs which over the long term can significantly detract from performance.

In early 2004, the Company introduced a discount control mechanism, with a commitment to protect a discount of 5% through buybacks. The shares can be held in treasury and then reissued. The Company has experienced significant periods where it has traded at a small premium and this has allowed new shares to be issued. As a result of these active policies, the average discount has been well within the 5% discount target since 2004.

In 2007, the Board of the Company appointed Frostrow Capital LLP as Manager, Administrator and Company Secretary, responsible also for marketing and promoting the Company. This is an increasingly popular model for investment companies, whereby the Board separates the investment management function from the remainder of the ancillary services required by an investment company. This ensures that the advice and services the Board receives are truly independent of the investment management function.

In February 2011, the Company’s broker, Winterflood Securities, said this about the Company:

“We believe that Finsbury Growth & Income is a unique fund, with a well defined strategy clearly differentiated from other UK Income Growth vehicles. With a portfolio of only 24 companies, this fund is clearly not a closet index-tracker. Nick Train is influenced by the approach of Warren Buffett, and there are undoubtedly similarities given his long term investment horizon and the focus on strong brands/franchises. The fund is currently heavily weighted to consumer brands with Diageo and Unilever the largest holdings.

Given the investment approach, short term returns may be volatile, and should not be expected to be in line with the benchmark. However over longer time frames this fund has a proven record of strong performance. The dividend cut in 2010 was clearly a disappointment, however we believe this fund remains well placed to generate attractive total returns over time. In addition, the fund’s commitment to buy back shares at a 5% discount provides support for the fund’s rating at that level. As a result, we believe that the fund is an attractive vehicle for long-term investors.”